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The 26th Annual Elements of Successful Franchising

Monday, January 30, 20179:00 AM – 12:00 Noon

Speakers: Rich Greenstein, CFE, Partner & Chairman, Franchise and Distribution Practice, DLA Piper; Tom Kaiser, Assistant Editor, Franchise Times; Rick Morey, CFE, Partner, DLA Piper;

Shelly Sun, CEO/ Founder, Brightstar

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Partner | DLA PiperRich Greenstein

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Shelly SunCEO/ Founder | Brightstar

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Rick MoreyPartner | DLA Piper

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Tom KaiserAssistant Editor| Franchise Times

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Takeaways• Trends for 2017 affect large and small franchisors

• Private equity franchisors/franchisees great at building brands

• Regulatory changes in 2017 and beyond could affect franchising

• Franchising outside the US is still very much in a growth mode

• International expansion will continue growing in importance, especially for largest, legacy franchisors.

• The largest franchisees are growing very quickly, with several brands now only interested in multi-unit franchisees.

• Expect more medical franchises, with several big-name partnerships with legacy medical systems.

• Bet on franchises investing in technology.

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WHAT ARE THE TRENDS FRANCHISORS WILL BE FACING?

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CONTINUING SEARCH FOR MULTI-CONCEPT FRANCHISEES

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• Growing brands looking for franchisees with successfultrack records of development in other systems

• Many brands now allow franchisees to operate competitive brands

• Multi-concept franchisees advantage for growing brands• Almost 50% of Franchise Times Restaurant

200 operate multi-concept Franchisees• Proliferation not simply because

brands are part of the same enterprise – FOCUS Brands, YUM! or Service Brands International

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• Experienced operators• Familiar with “playing by the rulebook”• Track record of franchise agreement

compliance• Knowledge of real estate, staffing resources and

consumer habits in local market• Economies of scale/infrastructure – lead to cost savings

and potential for greater profits

Why Multi-Concept Franchisees?

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• Not your typical owner-operator• Is there a passion for the brand and the business?• Divided attention and competition for "best” new sites and capital• Poor results in other

businesses could impact success of your brand– Interlocking/

cross-collateralized financing

Not Always a Perfect Solution

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REFRANCHISING: BACK AGAIN AND MORE POPULAR THAN EVER

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Refranchising is the process of selling off company-owned franchises, usually to multi-unit franchisees, to lower costs and boost income without the additional expenditures needed to run that particular unit.

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Not a New Strategy….Comes Back Every Few Years

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0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

2013 2014 2015 2016 est.

Re-franchise Activity as % of Total Franchised Units

Source: FranData

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12.2%

7.6%

6.4%

5.4%

5.0%

4.5%

4.3%

3.8%3.1%2.5%

45.2%

Brands with Most Refranchising Activity (2015)

7-Eleven

Snap-on

Wendy's

Hissho

Jamba Juice

Bimbo Foods Bakeries

McDonald's

TGI Fridays

Merry Maids

Liberty Tax Service

Others

Source: FranData

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• Benefits for franchisors

– reduce cap-ex. and other expenses; Asset lite

– bring new franchisees to the system or increase the holdings of your successful franchisees

– generates cash profitability

– couple sale of company units with an obligation to develop more units

– accelerate remodeling old company units

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• Benefits for buyers

–provides instant infrastructure for new development

–place for private equity and multi-concept franchisees to grow

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TECHNOLOGY – KEEPING UPWITH COMPETITION AND YOUR

CUSTOMERS

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Source: RSM 2015

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Source: RSM 2015

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Source: RSM 2015

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How Are Franchisors Utilizing Technology?

• Mobile solutions• Delivery mechanisms• Enhanced point of sale systems – access to data and ability to customize• Time-saving apps• Improved loyalty programs• Pop-ups/Kiosks = access to different

types of sites• Cloud computing• Upgraded intranet system• Social media

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Benefits Franchisors are realizing

• Spend less time training

• Provide better service to its customers

• Improved relationship with franchisees

• Competitive advantage

• Boost sales

• Reduce labor costs

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Digital Marketing Strategies

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Source: FranData

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EMPHASIS ONPRIVACY AND DATA SECURITY

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• Data breaches: expensive, time-consuming

• Litigation and regulatory risk

• Loss of consumer confidence

– Personal information/data

– Credit card numbers

• Need to be proactive

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• Federal Trade Commission Act

• The Payment Card Industry Data Security Standards (PCI DSS)

• Telephone Consumer Protection Act

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SELLING FRANCHISES: NUMBERS AND MORE NUMBERS—FINANCIAL PERFORMANCE

REPRESENTATIONS

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• Financial performance representation: any representation, including any oral, written or visual representation, to a prospective franchisee, including a representation in the general media, that states, expressly or by implication, a specific level or range of actual or potential sales, income, gross profits, or net profits.

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• Increased choices lead to need fordifferentiation during sales process

• Buyers want current financial information to aid in decision process

• Arming franchise sales force with the best sales tools

• Newer brands at disadvantage if they cannot produce some type of positive financial information

• Edgier type of ads featuring numbers will be coming in 2017

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• General media?

• Company statements in speeches and press releases?

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• Need reasonable basis for representation

• Item 19 of FDD

• Projections

• Examiners implementing changes in 2017…likely need to rework many FPRs in use today

Key Elements

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REMODELING

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Brands are implementing remodeling programs

Companies seeing same store sales increases

Franchisees often required to remodel at least once during 10 year franchise term and upon renewal

Franchisors may offer financial incentives for franchisees to remodel on favorable financing terms (i.e. retain old royalty/marketing fee structures)

Remodeling costs often reach upwards of $500k

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- Job No. 1701-002322

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BrightStar Care Story

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Our Years of Franchising(2006-2016)

1027

65

114140

251269

309

7 1027

4551 47

63 69

0

50

100

150

200

250

300

350

Year 1 - 2006 Year 2 - 2007 Year 3 - 2008 Year 4 - 2009 Year 5 - 2010 Year 7 - 2012 Year 9 - 2014 Year 11 - 2016

Franchisee Units Open FTE

System-wide

revenue (000) $3,143 $9,801 $24,674 $50,183 $98,704 $211,963 $290,022 $373,303

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The Journey: BrightStar Care’s History and Evolution

2002 – 2006

Validated the model - Expanded from one

company owned location to three

Brand differentiation (technology)

Initial board of advisors

First franchise location opened in 2006

2007 – 2011

Invested in differentiation (JC)

Transitioned from generalists to specialists

Rebuilt board of advisors

Launched FAC

Intellectual property secured for multiple

adjacent brands and international

Undercover Boss

2017 and Beyond

HBS

International expansion and

adjacent brand expansions

Streamlining SLT to smaller

ELT and building NLT to

invest in managers at all

levels

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2012-2016

Rebuilt board of advisors (2012)

JC Enterprise Champion For Quality Award

C-suite investments – CMO, CTO, CFO

EOS (2013)

National advertising on TV (2014)

Opened first BrightStar Senior Living

Community (2014)

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Takeaways1. Ensure you have differentiation from your competition and double down on those

investments

2. Invest in Intellectual Property early (Trademarks and URL’s)

3. Read and implement Gino Wickman’s Traction and its EOS

4. Form a Board of Advisors

5. Utilize Performance Groups

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Rick Morey, Partner, DLA Piper

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Private equity makes its mark on franchising

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What is private equity?

–Institutional investors

–Short horizon

–Rely on existing target management

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– Private equity buying into franchisees

Deal flow in 2016 - Franchisees

Atlantic Street Capital Acquires Restaurant Franchisee Trucking Firm

Pizza Hut buyers eye bigger slice of outlet action

Private equity affiliate buys Orlando's Jimmy Johns franchisee

Wendy's testing new restaurant concept after deal for fast food rival in

Japan

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Deal flow in 2016 – FranchisorsValpak Sold 2 Platinum Equity

MOD Pizza Gets Fidelity $

Window Genie Goes 2 Dwyer

Senior Helpers Goes 2 Altaris

Jan-Pro & Maid Right Go to Incline

Red Lobster Gets Investor

Twin Peaks Sold

Nothing Bundt Cakes Goes 2 Levine

Vantage Bought By Red Lion

Baja Fresh & La Salsa Go 2 MTY

Cici’s Sold 2 Arlon

Wetzel’s Pretzels Sold 2 CenterOak

Right at Home Sold 2 IMC

Salad Creations Sold 2 Miami Grill

Batteries Plus Sold 2 PE

Drybar Goes 2 Roark

Fired Pie Gets Investor

Project Pie Sold 2 Pieology

Gigi’s Sold 2 FundCorp

Burger & Beer Sold 2 PE

Krispy Kreme Goes 2 JAB

Friendly’s Sold 2 Dean Foods

Smiling Moose Sold 2 Growler

Murphy Business Goes 2 Greybull

Pak Mail Sold 2 Annex

Swimtime Sold 2 Investor

Quaker Steak Sold 2 TravelCenters

MOD Pizza Gets $ From PWP

Massage Heights Buys Gents Place

Marriott 2 Acquire Starwood

Black Bear Diner Sold 2 PWP

Fuzzy’s Taco Gets NRD $

Orangetheory Goes 2 Roark

Just Salad Gets Panda $

Max & Erma’s Sold

Pieology Gets Investor

Budget Blinds Sold 2 Trilantic

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Private equity ownership of franchisors:a good or bad thing?

–Share expertise or stifle innovation?

–Build brands quickly

–Short-term focus?

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PE Buyers of franchisees

–Size and established infrastructure

–Expansion rights

–Good relationship with franchisor

–Profitability

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Private equity ownership of franchisees:good or bad?

–Succession plan

–Cause for concern for franchisors?

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PE-backed franchisees need concessions

• Transfer approval rights

•Guarantees

• Right of first refusal

•Non-compete

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Election aftermath: regulatory consequences for franchisors

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NLRB/union activity

–NLRB composition

–McDonald’s cases underway

–Union running game plan

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Joint employer on other fronts

–States

–Private plaintiffs

– International

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Minimum wage

– Puzder as Labor Secretary will help

– State- and local-level laws

– Modernize Facilities?

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TOM KAISER, ASSISTANT EDITOR, FRANCHISE TIMES

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Franchise Times Top 200

Ranked By

Worldwide Sales

And

Locations

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Top 200 Restaurant Franchisees

Based on Annual Sales and Locations

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Franchise Times 200

2015 2005

Sales $596 Billion $421 Billion

Locations 497,335 404,662

% Franchised 86% 82%

% International 38% 29%

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The Top 10 Franchises—RevenueCompany Worldwide Sales

McDonalds $82.7 Billion

7-Eleven $81.5

KFC $22.6

Burger King $17.3

Subway $17.1

Ace Hardware $14.8

Pizza Hut $12.0

RE/MAX $10.2

Wendy’s $10.0

Marriott $10.0

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The Top 10 Franchises—LocationsCompany Worldwide Locations

7-Eleven 58,711

Subway 44,105

McDonald’s 36,525

KFC 19,952

Pizza Hut 16,063

Burger King 15,003

Domino’s 12,530

H&R Block 11,950

Dunkin’ Donuts 11,750

Coverall 8,871

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10-Year Sales GrowthCompany Worldwide Sales

7-Eleven $43.5 Billion

McDonald’s $29.7

KFC $9.4

Subway $8.0

Hilton Hotels $5.6

Burger King $5.3

Domino’s $4.9

Chick-Fil-A $4.7

Dunkin’ Donuts $4.1

Keller Williams $3.9

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10-Year Unit GrowthCompany Worldwide Locations

7-Eleven 29,246

Subway 19,295

KFC 6,059

McDonald’s 5,754

Dunkin’ Donuts 4,729

Domino’s 4,450

Burger King 3,899

Pizza Hut 3,515

Liberty Tax 2,443

Jimmy John’s 2,039

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10-Year International Unit GrowthCompany International Locations

7-Eleven 27,064

Subway 12,084

KFC 7,230

McDonald’s 5,235

Burger King 4,453

Domino’s 4,342

Pizza Hut 3,229

Baskin Robbins 2,248

Dairy Queen 1,876

Dunkin’ Donuts 1,443

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10-Year Percentage GrowthCompany Worldwide Sales

Edible Arrangements 1231%

Jimmy John’s 820%

Wingstop 596%

Marco’s Pizza 510%

Buffalo Wild Wings 454%

Plato’s Closet 433%

Firehouse Subs 427%

Zaxby’s 332%

Primrose Schools 322%

Home Instead Senior 267%

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Franchise Times 200Franchise Concentration

% Franchised 2015 2005

100% 63/200 59/200

>80% 140/200 118/200

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Franchise Industry Categories • Automotive Services – sales up 4.4%

• Service Brands – up 7.2%

• Cleaning Services – up 0.2%

• Health & Medical – up 14%

• Hotels & Travel – up 5.9%

• Personal Care & Services – up 7.6%

• Printing & Shipping – up 3.6%

• Family/Casual Dining – up 4.2%

• Fast-Casual – up 10.2%

• QSR – up 0.3%

• Sandwich – down 2.5%

• Retailers – down 1.5%

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Restaurant Finance Monitor 200

2015 2005

Revenue $34.6 Billion $19.9 Billion

Locations 25,176 16,030

Multi-Concept 95/200 109/200

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Monitor 200—Largest FranchiseesCompany Annual

SalesConcept

Flynn Rest. Group $1.65B Applebee’s/Taco Bell

NPC International $1.22B Pizza Hut/Wendy’s

Dhanani Group $871M Burger King/Popeye's

Carrols Rest. Group $859M Burger King

Manna $814M Wendy’s/Chili’s

Summit Rest. Group $756M IHOP/Applebee’s

MUY! Companies $631M Pizza Hut/Wendy’s

Covelli Enterprises $623M Panera/Dairy Queen

Yadav Enterprises $602M Jack in the Box/TGIF

Sun Holdings $438M Burger King/Popeye's

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What have we learned From the Franchise Times 200 Study?

• U.S. franchise brands are taking advantage of tremendous international growth opportunities.

• Over ten years, the percentage of international locations in the total store base has increased from 29% to 38%

• Franchising has become preferred strategy for growth over company-store development.

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Continued…• Sales @ top 10 brands declined for the first time in 2015

• Overall Top 200 grew sales by 2.2% ($12.5 billion)

• The largest 10 brands lost a combined $7.3 billion in sales

• Multinational franchisors in top 10 added a significant number of new units, largely outside of the U.S.

• Standout brands: Burger King (up $287M), Ace ($557M),RE/MAX ($1.18B), Wendy’s ($405M), Marriott ($400M)

• Brands 11-200 added 8,918 new units—5,709 were in U.S.

• Increased cost & labor pressures, stretched disposable income

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What have we learned From the Monitor 200 Franchisee Study?

• The primary concept is a major brand.

• Growth is coming from consolidation, rather than new unit growth.

• Relaxed lending, PE firms, tighter margins and high remodeling costs are driving additional consolidation.

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Continued…

• The 25 largest ‘zees now account for more than $14B in topline sales.

• Monitor 200 ‘zees own an average of 126 restaurants – up 10 from last year

• Back in 2010 that number was only 89

• Overall, Top 200 ‘zees added 2,000 total restaurants between this year and last

• 10 ‘zees had revenue in ‘15 greater than $500 million90

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#1: Flynn Restaurant Group• Debuted on M200 in ‘02 w/81 Applebee’s, $195M in

revenue

• Now: 484 Applebee’s, 179 Taco Bells, 47 Panera's - $1.65 billion in revenue

• Partnered w/Goldman Sachs and PE investor Westin Presidio in late 2000s

• Big break came in ‘07 when Applebee’s was acquired by IHOP, CEO forced to sell company stores to pay down debt

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What’s In Store For the Future?

• International development remains a viable opportunity for more franchise growth

• Low interest rates and capital availability are fueling franchising

• Private equity funds and family offices are increasing their investments in franchisors and franchisees

• Capital migrates to the largest brands

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WHAT DOES THE PRESSURE TO “GO INTERNATIONAL” MEAN FOR YOU?

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THE CONTINUED GROWTH OF INTERNATIONAL FRANCHISING

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200 Top Franchisors now have 38% of their units outside the U.S.

2012-2015: these Franchisorscollectively added 4 internationalunits for each unit openeddomestically

Larger franchise network, higherpercentage of units outside U.S.

International Growth

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Courtesy of Franchise Times

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• But Not Just the Giants. . .

• And Not Just Food Service. . .

• And Not Just Hotels. . .

• Service and Retail. . .

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International Growth

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Does your company currently either franchise or operate locations in international markets?

Does your company plan to accelerate or start new franchise operations in international markets?

How important is international to your company’s future success?

89.2%

84.3%

79.5%

Source: IFA 2014

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Factors influencing where to pursue international opportunities

• Population • Regulatory Framework• Currency• Legal system• Middle class - disposable income• Infrastructure• Labor Force• Competition

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Beware of…

• Timing issues• Selecting wrong franchisee(s)• Short term gain at expense of long term success• Failing to use experienced counsel• Selecting wrong structure (master franchisees-area

franchisees)• Franchisors failing to utilize the necessary resources

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WHY IS THIS HAPPENING, AND WHY IS IT HAPPENING NOW?

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THE LEGAL ASPECTS OF INTERNATIONAL FRANCHISING

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Franchise Laws Around the World: at the End of the 1970’s

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Franchise Laws Around the World: at the End of the 1980’s

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Blue = Disclosure Law

Green = Relationship Law

Red = Disclosure & Relationship Laws

Black = Other

Countries with Specific Franchise LawsJanuary 2017

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The Americas

Antigua and Barbuda

Argentina

Barbados

Brazil

Canada

Alberta

British Columbia

Manitoba

New Brunswick

Ontario

Prince Edward Island

Mexico

United States

Federal

Several States

Several States

Several States

Within EU

Belgium

Estonia

France

Latvia

Lithuania

Italy

Romania

Spain

Sweden

Non-EU

Albania

Belarus

Georgia

Moldova

Russia

Ukraine

Central Asia

Mongolia

Kazakhstan

Kyrgyzstan

Turkmenistan

Asia

China

Japan

Macau

South Korea

Taiwan

Vietnam

South Pacific

Australia

Indonesia

Malaysia

Does Not Include:

• Codes of conduct which do not provide for governmental or private enforcement, even if promulgated under governmental authority.

• Bodies of law (e.g. commercial agency, distributorship, competition, intellectual property, etc.) which may also cover franchising.

• Registration requirements that exist in many countries under various laws (e.g., franchise, foreign exchange, intellectual property, competition, etc.).

Africa

South Africa

Angola

Tunisia

Western Asia

Azerbaijan

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STILL PREDOMINANTLY NORTH AMERICAN…

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Takeaways• Trends for 2017 affect large and small franchisors

• Private equity franchisors/franchisees great at building brands

• Regulatory changes in 2017 and beyond could affect franchising

• Franchising outside the US is still very much in a growth mode

• International expansion will continue growing in importance, especially for largest, legacy franchisors.

• The largest franchisees are growing very quickly, with several brands now only interested in multi-unit franchisees.

• Expect more medical franchises, with several big-name partnerships with legacy medical systems.

• Bet on franchises investing in technology.

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CONTINUING CHALLENGES FACING FRANCHISORS AND FRANCHISEES

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Q & A

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Contact InformationRich Greenstein

Email: rich.greenstein@dlapiper.comT: 404-736-7816

Tom KaiserEmail: tkaiser@franchisetimes.comT: 612-767-3209

Rick MoreyEmail: richard.morey@dlapiper.comT: 312-368-7088

Shelly Sun

Email: shelly@brightstarcare.comT: 847-693-2008

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DLA Piper LLP (U.S.) gratefully acknowledgesthe following:

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